Italian Media Sector
Preparing Ground for Better Times
􀂃 Sector overview. The outlook for the advertising market continues to be very gloomy. The
sharp deterioration started in 4Q08 should continue at least for 1H09, with 2H09 possibly
seeing a better trend, which would be only due to an easier comparison with 2H08 figures. In
any case, FY09 is likely to be very negative, with the duration and depth of the crisis still
unclear. In our view, the lack of visibility is the major issue for the media sector. We believe
that publishers should also suffer from an ongoing decline of circulation and add-on sales.
􀂃 Efficiency and innovation. In such an unfavourable scenario and with little control over a
significant part of their top-line, media companies should focus on: 1) efficiency, in order to
defend profitability in the short-term and to be prepared with a leaner and less costly
operating structure for when the market eventually recovers. Most of the companies are
adopting savings plans, but we believe that in some cases cost-cutting measures should be
more aggressive; and 2) innovation, in order to better exploit new media potentiality and to
be ready to face possible structural changes in the market, where some media (namely printed
media) are likely to lose market shares in favour of the new and emerging ones.
􀂃 Our new assumptions. We change our assumptions for 2009E on the market as follows:
1) we reduce our forecast for advertising for both magazines and newspapers in Italy to -10%;
2) we reduce our estimates for add-on sales to -15% yoy; and 3) we cut our estimates for TV
advertising in Italy to -5%. Based on these new assumptions, we revise downwards our
forecasts for all the companies under our coverage. In addition, we update our DCF-based
valuations, incorporating in our WACC calculations our new risk-free rate of 4.50% and risk
premium of 5.75%.
􀂃 Valuations and key risks. We believe Cairo Communication (BUY, TP EUR 2.40/share)
should present a high risk related to the contract for TV advertising of La7, but it could benefit
from a positive conclusion of the litigation with Sky. The high cash position should limit stock
volatility and give high visibility to dividend. Gruppo Editoriale L’Espresso (REDUCE, TP
EUR 0.60/share) released disappointing results at the bottom-line level. Despite cost-cutting
measures, 2009E could be even worse due to the high exposure of the group to the
advertising segment. Despite its diversified business model, Il Sole 24 Ore (HOLD, TP
EUR 2.30/share) could suffer from its rigid cost structure, but its significant cash pile could
limit stock volatility. Mediaset (BUY, TP EUR 4.40/share) should be more resilient to the
advertising decline, but we do not believe its cost-cutting policy to be aggressive enough. In
our view, Mondadori (BUY, TP EUR 3.15/share) is the most defensive player in the sector,
and could offer a 2008E high dividend yield, although a disappointing cash generation in
2008E could suggest management to maintain a prudent attitude. Lastly, on
RCS Mediagroup (HOLD, TP EUR 0.56/share), we think that the major issue relates to the
high leverage that should suggest some action to reduce debt (i.e. asset disposal or capital
increase).

Contents
Sector Overview 3
Efficiency 4
Innovation 5
Our Revised Assumptions 7
Sector Multiples and Performances 8
Company Section 9

Sector Overview
The advertising market trend: still no light at the end of the tunnel
The outlook for the advertising market continues to be very gloomy, with the trend sharply
deteriorating in the last part of 2008. According to Nielsen data, the advertising market was
down by 2.1% in September, by 5.5% in October and by 13.4% in November, thus showing
quite a sizeable worsening that should also continue in December and in the first part of 2009.
On a cumulated basis, the market in the first 11 months of 2008 was down by 2.1% yoy.
In addition to the negative trend, the current phase is characterised by extremely poor visibility.
From our talks with the media companies, we understood that the investments on different
media are confirmed by spenders with very little advance notice, from a few days in the case of
TV advertising to a few weeks for magazines, basically corresponding to the minimum technical
lead-time for the advertising to be published/broadcasted. In such an uncertain scenario, it is
very difficult for companies to make reliable estimates and budgets for the FY. However, some
points seem to be certain:
􀂃 Advertising spenders are to date very prudent and are severely cutting their budgets for
advertising investments. If and when this trend could be reversed will depend on general
economic conditions and especially on the consumer spending trend;
􀂃 The trend for the advertising market should continue to be very negative at least for 1H09,
with 2H09 possibly seeing a better trend, which should be mainly due to an easier comparison
with the already negative 2H08 figures. In any case, FY09 is likely to be very negative;
The depth and duration of the negative phase is unpredictable. Looking at past market cycles,
the recovery in advertising spending usually started after approx. 18 months from the beginning
of the crisis. Thus, the market could start recovering in 2H10, should the current cycle be similar
to the past ones. However, note that: 1) similarly to the general economic trend, also the
advertising market trend appears to be different (and worse) from any other precedent cycle;
and 2) even if a recovery materialises next year, it is unclear what bottom level will be reached
this year.
Media players’ 2009 mission: stand their ground and prepare for better times
In such a negative scenario, media companies will face tough times. We believe they have little
chance to avoid a decline in their top lines. Moreover, the drop in advertising revenue should
have a strong impact on profitability, thus we believe that they will have to focus on:
􀂃 Efficiency: in the short term, since companies have no control over their top line (or at least
over a significant part of it) focus should move on cost-cutting measures in order to limit the
decline in profitability and to be prepared with a leaner and more efficient operating structure
for when the market eventually recovers;
􀂃 Innovation: in the longer run, media companies should be ready to face possible structural
changes in the market. Preferences of the audience are changing: some media (namely
printed media) are likely to lose market shares in favour of new and emerging media, such as
Internet, mobile communication, and digital TV.